Almost two-thirds of commercial banks that lend to the commercial property sector expect debt conditions to deteriorate further this year owing to the effects of the credit crunch, according to a survey by agents GVA Grimley.

The survey said that banks have already tightened lending criteria on commercial property, with most charging higher interest rates and exacting tougher terms on loans to investors and developers.

The commercial property industry has been hit by the shortage of available credit. The sector’s transactions are largely debt-financed, with equity forming as little as 10% of finance for new purchases.

“There is much more caution out there”, said Tim Crossley-Smith, director of GVA Grimley. “Swap rates are back to where they were last year but banks are still putting up rates.”

Meanwhile, banks are demanding that investors finance more of the purchase price with their own equity. Loan-to-value (LTV) has been reduced in the past six months by about 8%, and the average LTV ratio now stands at about 75%.

The survey concluded: ‘There appears to be a high degree of uncertainty over how the overall financial situation will change over the next three months, although on balance, lenders believe that conditions will get a little worse. A rapid return to normal is certainly not expected.’